Housing Rebound Going Strong, Home Depot Has Upside

Home builder confidence is continuing to improve, rising for the fifth consecutive month in February, rising from 25 to 29 on the NAHB/Wells Fargo Housing Market Index (HMI).

“This is the longest period of sustained improvement we have seen in the HMI since 2007,” says NAHB Chief Economist David Crowe.

Although, the sustained improvement in the HMI signals a more confident outlook of the housing industry, readings are still very low historically. The likelihood of seeing a sustained recovery is still susceptible to other factors affecting the market.

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The sharp increase in sentiment stems from improvement of all three components of the index: traffic of prospective buyers rose from 21 to 22; sales expectations for the next six months increased from 29 to 34, and current sales rose from 25 to 30.

The constant struggle between foreclosures and new home sales remains, with many builders “seeing appraisals come in at less than the cost of construction.”

Further, damaged credit of potential buyers and hefty down payment requirements limit the number of people who can successfully apply for mortgages.

Citi analyst, Kate McShane marks Home Depot as a “buy,” in anticipation of more upside in 2013 and 2014. Home Depot has shown signs of being a strong contender in a delicate market with successful merchandising execution, technology and labor initiatives and improving demand.

Recent results from the company point to robust sales in appliances and “store level disruptions at Sears are likely providing a lift to appliance sales at competitors.” Home Depot stock currently trades at $45.93, just 50 cents off of its 52-week high.

NAHB Chairman, Barry Rutenberg remains cautious about the housing improvement as the “sector remains very fragile with significant differences between individual markets.”